SIE Understanding Trading, Customer Accounts and Prohibited Activities Question 55: Answer and Explanation

Question: 55

Which of the following is a reason for the board of directors to approve a rights offer?

• A. To provide another security's shares in exchange for the desired shares
• B. To publicly announce an offer to purchase shares for a certain price if a minimum quantity of shares are provided in response to the offer
• C. To replace old shares with new shares with twice the par value
• D. To raise additional capital by offering current shareholders the opportunity to purchase the number of shares to maintain proportional ownership

Correct Answer: D

Explanation:

D: Choice D is correct because this allows shareholders with significant percentage ownership to maintain their same level of influence in stockholder elections. Choice A is incorrect because a rights offer does not involve another security's shares. Choice B is incorrect because this is a tender offer, typically made by an outside firm. Choice C is incorrect because old shares will not be replaced.